Warning signs in the US stock market: Retail investors are "no longer bottom-fishing, selling on rallies"!

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The behavioral patterns of U.S. retail investors have been undergoing the most concerning shift since 2020—rather than stepping in to buy the dip during downturns, they are now steadily trimming their positions by taking advantage of rebound opportunities.

According to JPMorgan’s latest report, the total amount of retail buying in March fell by nearly 50% from the historical peak in January. Last Wednesday saw a temporary rebound in the market; while retail inflow data was still overall acceptable, the composition clearly tilted toward fixed-income ETFs rather than equity assets. This means retail investors’ risk appetite is continuing to contract, rather than being repaired as the market improves.

The potential impact of this behavioral shift should not be underestimated. Retail investors have long been an important marginal buyer when U.S. stocks fall, and their “buy-the-dip” inertia provides a natural stabilizing effect on the market. Now that this support appears to be wavering—while institutions also have not shown any obvious re-entry—the growing capital vacuum between the long and short sides is increasing the market’s fragility.

A historic reversal: “momentum crowding” surpasses “buy-the-dip crowding”

JPMorgan analysts Arun Jain said that retail investors have been chasing momentum strategies since the end of 2023. After entering 2024, they gradually locked in profits among long-term winners while also looking for opportunities in underperforming issues. Historical patterns show that retail investors typically prefer to buy on declines, concentrating their additional purchases in the lagging targets that have started to fall—within three months; since 2020, this “left-tail buying” strategy has had an average return that is positive.

However, this behavior has recently experienced a historic reversal: retail investors’ degree of crowding in short-term momentum names has, for the first time, exceeded their crowding in lagging names. This implies that retail investors currently still hold high-beta assets (crowding is at the 92.5th percentile, closely matching short-term momentum), instead of adding to positions in low-volatility (that is, the currently lagging) issues. At the same time, retail investors are continuing to cut their exposure to cyclical assets.

This fundamental shift in the logic of retail behavior marks a change in retail’s role—from previously acting as a “stabilizer” for the market, to taking a more defensive posture, even avoiding risk on a short-term basis. For U.S. stocks that rely on retail capital to provide bottom support, this is a structural warning that is worth closely monitoring.

Retail buying power collapses; March data shrank by nearly half versus the January peak

On the data front, the retreat in overall retail purchasing power in March exceeded expectations.

According to JPMorgan’s report, as of last Tuesday, retail investors still maintained modest net inflows into ETFs, but at the level of individual stocks they continued to show a net selling trend—even though the market had seen some rebound during that period.

Last Wednesday, the market strengthened and retail’s overall inflow for the day was at the 76.6th percentile, which looks healthy on the surface, but it was mainly driven by ETFs (the 96.4th percentile).

More importantly, the incremental buy-side flow in ETFs was concentrated in fixed-income ETFs (the 98th percentile), led by short-duration instruments such as SGOV, rather than risk assets like equities. At the individual-stock level, retail recorded some inflow at midday (the 64.7th percentile), but then continued trimming positions in the afternoon, returning to almost flat on the day’s close (the 38.1st percentile)—a typical “rebound then distribution” pattern.

Energy sees its largest weekly net outflow on record

At the single-stock level, after excluding “Mag 7” (the seven biggest technology companies), retail investors showed net selling across virtually all sectors for the week ending April 1, with only consumer staples as an exception.

Energy selling was especially severe.

Since February, retail investors have continued to be net sellers of energy stocks, but last week saw a sharp acceleration in selling pressure, peaking on Wednesday. It marked the largest week of net outflows on record, and the magnitude far exceeded the historical extreme. ExxonMobil (XOM), Chevron (CVX), and Occidental (OXY) were the main drags, with z-scores of -6.9, -6.6, and -5.6 on Wednesday, respectively.

The storage chip sector also faced pressure. After Google announced a new compression technology that can reduce memory requirements for AI models, Micron (MU) and SanDisk (SNDK) became the storage-related stocks sold the most that week, with z-scores of -2.3 and -3.0, respectively.

The technology sector as a whole was also unable to escape. While retail continued buying retail favorites such as TSLA, MSFT, and NVDA, it continued to net sell technology stocks outside of the “Mag 7,” causing the technology sector’s overall positioning to fall to its lowest level in nearly six months.